The last time I talked to Canyon Partners’ Joshua Friedman in January, the word “transitory” was still a possibility when describing inflation, Russia had yet to invade Ukraine, and the Fed was still easing. He called it a “fork in the road” and that was, perhaps, an understatement.
However, his latest take, as divulged in an interview for the Delivering Alpha Newsletter, on the direction the economy is headed is perhaps a bit more sanguine – especially than that of other credit pontificators. Friedman says the economy is ”strong enough to absorb…a slowdown, even if it qualifies, technically, as a recession because we have two quarters of contraction.”
Friedman says that he’s focused on the positives – with low unemployment, personal balance sheets that are “actually quite good,” and a stable banking system. He doesn’t think that the sole responsibility for a soft landing doesn’t actually falls solely on the Fed’s shoulders – that natural market forces may also hold the economy up by itself.
As such, the Fed will continue hiking, according to Friedman.
“It wouldn’t surprise me if the Fed continued to raise rates aggressively, if for no other reason than to restore their own credibility,” said Friedman. “So I think, to restore their credibility, to make it clear that inflation should be run out of the system and to communicate with the public in a way that the public will react; it would not surprise me if they even overreacted a little bit.”
He said the market has already provided a “sea change in the opportunity set,” with equities, investment-grade debt and high-yield debt markets all getting “destroyed.”
“June was the worst single month that we’ve seen in decades, with the exception of the immediate aftermath of COVID, which was gone like that, because the Fed bailed everyone out, which they’re not going to do this time,” he said.
But, to Friedman, the selloff doesn’t necessarily translate into distress – unwelcome news for distressed investors, who have been essentially waiting since the financial crisis for a bigger set of troubled opportunities to scoop up.
Even though Friedman “grew up in the distressed business,” he said the firm has “comprehensive shopping lists of securities” in other areas like secondaries, loan originations, and securitized packages.
“A modest uptick in unemployment, a modest decrease in available job openings…doesn’t throw the economy in anything like we had in 2008, in my view,” he said.
